The Insolvency Law Reform Act 2016 (Cth) introduces a new power for personal and corporate insolvency regulators: the show cause notice. This note explains the scope and potential consequences of this new power.
The Insolvency Practice Schedule (IPS) introduced as a new Schedule 2 of the Corporations Act 2001 (Cth) and Schedule 2 of the Bankruptcy Act 1966 (Cth) on 1 March 2017 centres on a new disciplinary regime for insolvency practitioners in Australia. One key element of these reforms is to give the insolvency regulators (ASIC for corporate insolvency and AFSA for personal insolvency) a range of flexible new investigation and disciplinary powers. The regulators have the power to refer disciplinary matters to a new ‘Part 2 committee’, which refers to committees established under Part 2 of the IPS (‘registering and disciplining practitioners’). The committee will then investigate, prepare a report and decide what disciplinary action is to be taken (if any), including (IPS s40-55):
- a public reprimand for the practitioner;
- impose conditions on the practitioner’s registration;
- a requirement that the practitioner not accept any further appointments (or any further appointments within a particular period);
- suspension of the practitioner’s registration; and
- cancellation of the practitioner’s registration.
The committee may also determine that the practitioner’s registration continue.
Both AFSA and ASIC are empowered to convene a committee where they have served a show cause notice on the practitioner and have not received a satisfactory response within 20 business days (IPS s40-50). The regulators may serve a show cause notice where they believe that any one of a number of matters exist, including:
- a lack of qualifications, experience, knowledge or ability;
- the practitioner has committed an act of bankruptcy (note: this does not mean that the practitioner has become bankrupt, which is an automatic cancellation of registration under IPS s 40-20);
- the practitioner becomes disqualified from managing corporations under either Australian or foreign law;
- breach of current license conditions;
- breach of a provision of either the Corporations Act (for liquidators) or the Bankruptcy Act (for trustees);
- for liquidators: the practitioner has had their registration as a trustee involuntarily cancelled (and vice versa for trustees);
- the practitioner fails to maintain adequate and appropriate insurance;
- the practitioner is mentally or physically incapable of performing their role;
- the practitioner has been convicted of fraud or dishonesty;
- the practitioner has failed to adequately and properly carry out their duties under federal, state and territory laws or under the general law;
- the practitioner is not a resident of Australia or other prescribed country; or
- the practitioner is not a fit and proper person to be registered.
This is clearly a regulator’s Christmas wish list of grounds upon which to take disciplinary action. A couple of points to note here:
- The regulator only has to believe, not demonstrate that they have reasonable grounds to believe.
- A belief that there is any contravention of the Act, however minor, can support a show cause notice. ASIC’s recent trend of sanctioning liquidators due to late lodgement of forms does not bode well for the use of show cause notices!
- Including disqualification from managing corporations within the relevant grounds for a show cause notice may help with addressing pre-insolvency advisors and improper phoenix activity, particularly where a registered practitioner could be said to be ‘involved’ in a company’s director’s breach of directors’ duties by engaging in improper phoenix activity.
ASIC released a new Regulatory Guide on 1 March 2017 setting out its views on how the new registration, discipline and insurance requirements should work: RG 258. In that guide it specifically states that it expects (as part of the grounds to serve a show cause notice) that liquidators will observe its guidance as part of their duties: [258.147]. Compliance with industry codes (such as the ARITA Code of Professional Practice and APES 330) are also relevant for assessing adequate and proper performance of duties: [258.150].
Show cause notices are a common part of regulatory toolkits, with hundreds of examples found across federal, state and territory laws. The ILRA is clearly aimed at streamlining disciplinary processes through non-judicial committees that are not bound by rules of evidence and that have fairly short time-frames, although that are bound to comply with principles of natural justice (Insolvency Practice Rules s50-55).
The prior regime for disciplining corporate insolvency practitioners was said, by some, to be cumbersome. The new discipline regime is certainly streamlined, but it remains to be seen whether it will be more efficient and effective. I can see a lot of work for administrative lawyers with appeals and judicial reviews coming from this new regime.